Pensioners and other dividend investors are searching for high-yield TSX stocks to add to their self-directed Tax-Free Savings Account (TFSA) portfolios focused on generating passive income.
While many Canadian stocks currently trade near record highs, contrarian investors can still find some companies trading at discounted prices.
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BCE stock
BCE (TSX: BCE) used to be a top pick among retirees for its generous and reliable dividend payments. That changed last year when the company slashed the payout by more than 50%. The move wasn’t a surprise, however, as the market had already driven the share price down considerably on the expectations of the cut.
Since then, the shares have roughly traded in a range of $30 to $35. BCE was as high as $74 per share in 2022.
BCE is working hard to reduce expenses in divisions that are struggling with revenue pressures while investing in new growth opportunities to anchor a rebound for investors. BCE continues to streamline its legacy radio and television businesses facing declining advertising sales. The media division does have bright spots, including BCE’s Crave streaming service, which has benefited from a jump in subscriptions driven by the global success of its Heated Rivalry television series.
BCE sees strong potential in the fibre space. The company acquired an American internet services provider, Ziply Fiber, last year for $5 billion. The deal gives BCE expansion potential in the United States where fibre penetration is lower than it is in Canada.
At home, BCE is building AI data centres to meet growing demand from government and corporate clients who want to ensure their data remains on Canadian soil.
Risks
A number of the issues that led to the decline in the stock over the past few years are still present. The reduction in the number of newcomers to Canada, particularly students, has impacted the sale of mobile devices and communications services plans. It will be some time before the government ramps up immigration numbers again due to the ongoing housing shortage in the country.
Price wars in the mobile sector have eased, but can still flare up as companies battle for a smaller pool of customers.
At the same time, rising yields in the government bond market are signalling market expectations for renewed hikes to interest rates by the Bank of Canada and the U.S. Federal Reserve. BCE carries a lot of debt, so a jump in borrowing expenses can put pressure on earnings and cash flow that is available for dividends.
Time to buy?
Ongoing challenges will likely cap the upside potential of the stock over the medium term, so investors seeking capital gains will need to be patient. The headwinds are widely known, however, and contrarian investors are starting to nibble on BCE while it remains out of favour.
Income investors might want to consider adding the stock at this level. Management reduced the dividend more than was likely needed, so the current payout should be safe, as long as there isn’t a major drop in revenue or a significant spike in interest rates.
